How do you currently analyse the risks involved in your decisions?
Do you consider them fully or try to ignore them and hope they don’t materialise?
When making a decision, do you wish you could see the potential pitfalls and opportunities more clearly?
You’re not alone.
Many of us struggle with analysing risks effectively, and this can hinder us from making confident decisions.
But why is it that we often find ourselves falling short when it comes to analysing risks?
Let’s explore some of the reasons and gain a deeper understanding of this common challenge.
“Risk is what’s left when you think you’ve thought of everything.”
Carl Richards
Factors that make it difficult to analyse risks:
Cognitive Biases
Our minds are wired in a way that can block objective risk analysis. We tend to rely on heuristics (mental shortcuts) that simplify decision-making but may overlook important risks.
For example, the availability bias leads us to give more weight to risks that are easily recalled from memory, while the optimism bias causes us to underestimate risks and overestimate positive outcomes.
You can learn more about cognitive biases in Vol. 003 of Decide.
Emotional Influences
Emotions can cloud our judgment and influence risk assessments.
Fear and anxiety may amplify the perceived risks, leading to avoidance or hesitation in decision-making.
Conversely, overconfidence and excitement can blind us to potential risks, making us more prone to taking unwarranted risks.
Vol. 005 of Decide explores the role of emotions in decision-making.
Lack of Information
Incomplete or insufficient information about risks can significantly hinder our ability to analyse them effectively.
We may overlook critical risks simply because we are unaware of them.
Additionally, complex or ambiguous risks can be challenging to assess accurately, especially in rapidly evolving environments.
“Risk comes from not knowing what you’re doing.”
Warren Buffet
Overemphasis on Rewards
When considering risks, we often focus more on the potential rewards or benefits associated with our decisions.
This cognitive bias, known as the risk-reward tradeoff, can lead us to downplay or overlook potential risks, making us more vulnerable to negative outcomes.
By understanding these underlying factors and acknowledging the challenges they present, we can take steps to overcome our inherent biases.
The Rumsfeld Matrix
I’d like to introduce you to a powerful tool called The Rumsfeld Matrix that can help you analyse risks more effectively. I found it in The Decision Book (which also inspired this volume of Decide).
This decision-making framework is named after former U.S. Secretary of Defense, Donald Rumsfeld. Ironically it comes from a man who arguably made massive mistakes when it came to analysing risks.
It helps you figure out and assess two things:
- Knowns
- Unknowns
The clip below is from a press conference in 2002 where he spoke about these.
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”
Donald Rumsfeld
It categorises risks into four distinct areas, allowing you to systematically evaluate and address them.
1 – Known Knowns
These are the risks that you are fully aware of. They are the ones you can identify and understand clearly.
For example, someone who is afraid of criminals stores their bicycle in a locked shed.
By acknowledging these known knowns, you can develop strategies to mitigate or overcome them.
2 – Known Unknowns
These are the risks you know exist but are uncertain about their exact nature or magnitude.
These uncertainties can be daunting, but they also hold opportunities for growth and innovation.
Imagine you’re planning a hiking trip, and you’re aware of potential weather changes but unsure of their severity.
By acknowledging these known unknowns, you can prepare contingency plans and alternative routes to adapt to unexpected situations.
3 – Unknown Knowns
Yes, I know it sounds paradoxical, but these are the risks that exist but you are unaware of. They can catch you off guard and derail your plans.
For instance, in the business world, a sudden shift in customer preferences or disruptive technology could impact your company if you are not aware of them.
To mitigate these risks, embrace a mindset of continuous learning and stay informed about industry trends and emerging threats.
4 – Unknown Unknowns
These are the risks that are completely outside your realm of knowledge. They are the wildcards that can blindside you.
While it’s impossible to predict everything, you can develop resilience by building a diverse network of trusted advisors, seeking different perspectives, and fostering a culture of openness to new ideas and possibilities.
“Catastrophes that strike us unexpectedly reflect a lack of imagination.”
Mikael Krogerus & Roman Tschappeler, The Decision Book
In conclusion, analysing risks is a vital skill for effective decision-making.
The Rumsfeld Matrix provides a valuable framework to assess risks comprehensively. By acknowledging known knowns, known unknowns, unknown knowns, and unknown unknowns, you’ll be better equipped to navigate uncertainty and make informed choices.
So, here’s your challenge: Take a decision you’ve been putting off and apply The Rumsfeld Matrix to analyse the risks involved.
Embrace the process of uncovering knowns and unknowns, and develop strategies to mitigate and adapt to them.
Remember, the more you practice risk analysis, the more confident and capable you’ll become in making better decisions.
Enjoy the rest of your Wednesday, and I’ll see you next week.
Ty
P.S. Say hey on Twitter and if you have a moment I would love your feedback on this volume, you can leave a comment here.
Well done Ty – I have enjoyed all of your “Decide” volumes – obviously well researched and conveyed your message well.
Well done!
Thank you Keith, that means a lot!